I realize many producers are cash sellers, and many don’t feel comfortable selling until it’s “in the bin.” But I am here to explain the perks of a Hedge to Arrive or an HTA, and how it adds flexibility to your operation. It is a risk management tool that eliminates risk altogether.
Let’s start with the basics. Every producer has done a cash contract, what are the pieces that make up a cash contract?
Futures + Basis = Cash
There are two parts to a cash contract. Futures are the publicly traded piece which continually moves during open hours of the Chicago Board of Trade, aka “The Board”. The basis is the local value, which is added to the current futures price. This number is often a negative number, which is removed from the futures price. So if the futures price is $4.30, and the elevator of your choosing has a basis of -.30 your cash price is calculated as follows
$4.30 + (-.30) = $4.00
Now let’s look at an HTA. An HTA is simply using the “futures” portion of the sale. By utilizing an HTA you lock in your desired futures price, and leave basis open. For example, you agree to an HTA and lock in futures at $4.30. The market can move up or down, but you have $4.30 locked in, but your basis has not been set. There are distinct advantages to leaving basis open. Many times basis prices improve when futures prices drop. Also setting basis nine months out can be pretty rough. So ideally, setting futures separate from basis gives you the ability to price them individually. Thus allowing you to lock in futures, wait for basis improvement and set it as we get closer to delivery. Additional advantages of leaving basis open are that your delivery location remains open until a basis is set, and your delivery time remains open as well. In short, you may decide your corn is too wet for the ethanol plant, and instead can choose set basis to a local feedlot accepting wet corn.
HTA’s allow you to make offers. Offers are a key part of a good marketing plan. Offers allow you to take advantage of market volatility, or reactions post report. Swings in the market that catch you off guard, but no matter how busy you are, the offer continues to work the market for you. A great example, after the June 30th USDA report virtually every offer I had for area producers filled. Many of these offers were .70-.80 over the market just a couple days earlier. Sometimes entering a “long shot” offer pays off!
Taking advantage of carry in the market is another distinct advantage. If you have $4.30 HTA and basis is not yet set, you have the freedom to hold the grain in your bin and roll the HTA to the next futures month, thus changing your delivery window from October-December, to January- March. The current spread on corn from December to March is about .11 cents. In other words, your futures price becomes $4.41 by holding the corn at home. Many times basis also improves into January, so the potential to gain additional profit in basis is present as well.
There is proof that selling ahead generally provides an advantage. How so? You might ask. Simply put, the more time you have to market, the more time you have for an opportunity. It’s not unreasonable to look at selling 18 months ahead. By doing so, you have 2 ½ years to market your grain, versus selling from the bin which provide just less than a year. In fact, some real statistics for you. Our ProEdge Consultant Service is a full marketing service program designed for producers who would like additional help with their marketing. The chart below represents how ProEdge consultant recommendations compared to the median sale (Futures only sales). Please note, consistently above the market with the exception of the drought year.
What’s the secret you ask? Well here you go:
2014/15 Corn 95% sold at $4.67 (first sale made April 2013)
2015/16 corn 60% sold at $4.33 (first sale made February 2014)
2014/15 Beans 100% sold at $10.95 (first sale made May 2013)
2015/16 Beans 70% sold at $10.45 (first sale made April 2014)
The theme here is simple, time equals opportunity. There is nothing wrong with taking profit when there is profit to be taken. If the market provides an opportunity to be profitable, taking some of that profit is a sound risk management technique. Don’t be afraid of the “what if’s” remove the emotion and focus on “what is!” Protect your profits in the event the market drops, if the market rallies, sell some more. We are talking about strategic sales to manage risk, not “guessing” the high.
If you would like additional information on Central Valley Ag’s HTA’s you can contact any of our specialists, just buy calling any CVA location. If you have interested in learning more about our ProEdge consultation services, just call Greg Mockenhaupt at the Oakland East Hub or Nathan Hake in Humphrey.